The Green Organic Dutchman – Minding the Pennies’ as it Strives for Billions in Cannabis Production

Dear Member,

To get a competitive edge in the burgeoning legal marijuana space, savvy companies look at every aspect of operations to the smallest detail, even each kilowatt of energy used in running their business and producing product. It’s a business practice of “mind the pennies and the dollars will take care of themselves.” Details like this are especially important if you’re the owner of one of the largest licensed land parcels in Canada, with growing capacity of 14,000 kilograms of medical marijuana annually, as is the case with The Green Organic Dutchman Holdings Ltd. (TGODH).

High (and Higher) Capacity

Last month, The Green Organic Dutchman Ltd. (TGOD), the wholly-owned subsidiary of TGODH, complemented its existing cultivation license with Health Canada granting the Hamilton, Ontario-based company a sales license allowing TGOD to sell medical cannabis to other licensed producers under the Access to Cannabis for Medical Purposes Regulations (ACMPR).

With the new wholesaler license, TGOD expanded its land footprint, saying last week that it secured a 75-acre property. Located in Salaberry-de-Valleyfield, Quebec, the property is planned to host a more than 820,000-square-feet, highly automated, state-of-the-art, hybrid greenhouse facilities. Development of the property is expected to begin in the coming months, culminating in TGOD increasing its annual growing capacity to approximately 116,000 kilograms.

To understand the scope of that type of production each year, consider the implications of sales dollars. Canaccord Genuity estimates that the average price of legal marijuana will fall between $8 and $9 per gram once total legalization occurs, which is slightly lower than the estimated average cost today with only medical cannabis legal. Still, for modest extrapolation purposes, at current capacity (14,000 kilograms, or 14.0 million grams), sales would equate to $112.0 million at the low end of the estimate. When increased to 116,000 kilograms (116.0 million grams), that figure jumps to $928.0 million on the low end and $1.044 billion on the high end.
The Capital to Get It Done

To keep the development strategy moving forward expeditiously, TGOD is adding to its coffers through a new $20 million private placement. The funding is broken down into two offerings: 1) led by PI Financial seeking to raise $7.0 million and 2) a separate non-brokered placement seeking to raise C$13.0 million. Terms for each are the same, involving the issuance or an aggregate of 12.1 million “units” at C$1.65 each. Each unit entitles the holder to one common share of TGODH and one-half common share purchase of TGODH. Each full warrant (collected by purchasing two units) is exercisable into one common share at the exercise price of $3.00 per share.

The warrants are good for three years from when the company starts trading on a recognized stock exchange or February 28, 2021, suggesting the TGODH is aiming to be a public entity within the next six months.

It’s hard telling exactly how TGODH intends to become a public entity, but they’re taking a unique, “retail first”-type of strategy to get there. In effect, offering the warrant component is akin to the structure that larger companies use in initial public offerings to reward their early investors. However, this is usually relegated only to funds, institutions and the like. The Dutchman is flipping the script and getting thousands of brand ambassadors, which is a multi-functional approach. From a business perspective, it will churn demand for TGOD products at all levels as the brand is synonymous with high-quality cannabis and, from an equity view, it will help with market liquidity, an integral part of efficient corporate development.

Expansion, Low-Cost Production at Precisely the Right Time

Given the fact that TGOD prides itself on a “craft” production business model, which means its small-batch, living-soil-grown cannabis is lab-proven to be free from pesticides, herbicides, synthetic nutrients, it should be able to command prices at the high end of the price scale. Organic cannabis sells today for several dollars more per gram and TGOD is one of only two organic producers in the whole country.

According to its latest corporate presentation, TGOD expects its new greenhouse to come online in 2018. The company also foresees Prime Minister Justin Trudeau fulfilling his campaign promise next year to make Canada only the second country after Uruguay to completely legalize marijuana, a legislative action that will increase marijuana demand.

The development strategy for the new facility includes TGOD’s alliance partners, Eaton and Ledcor, the industry experts at Larssen Ltd. Greenhouse Engineers and Hamilton Utilities Corp., with the goal of making TGOD not only the biggest licensed producer in Canada, but the producer of the highest quality medical cannabis at one of the lowest cost operations in the country.

In addition to all the necessary infrastructure being local, the new property, located about 50 kilometers southwest of Montreal, is less than a kilometer from a 50-megawatt substation. Based upon the location and design of the planned facility and government incentives, TGOD believes it can generate power at less than $0.04 per kilowatt hour.

It’s an astute move to select Salaberry-de-Valleyfield, as the location is central for servicing both Quebec and Ontario. When it comes to electric, consider that the Ontario Energy Board set its kWh rates in November at 8.7 cents (off-peak electricity), 13.2 cents (mid-peak) and 18.0 cents (peak). Quebec is generally less expensive, but TGOD’s goal of sub-4 cents is certainly attractive.

That goes without mentioning that TGOD’s fully funded expansion to 150,000 sq. ft. at its Ontario facility includes lowering costs from 13 cents per kWh to under 5 cents per kWh.

As noted by TGODH President Csaba Reider, the new property brings together several advantages that will prove instrumental in the company cementing itself a leading cannabis producer in Canada. “Quebec and Ontario represent approximately two-thirds of the Canadian population, or 22 of 36 million people. This strategic location reduces the cost of shipping, in turn, enhancing the customer experience,” said Reider in a press release announcing the land acquisition.

Add in neighboring U.S. states and the potential of cannabis tourism visitors and the opportunity more than doubles.

With these things in mind, it’s not a tremendous surprise that the company has already raised $41.5 million through more than 2,400 shareholders to fulfill its vision and gaining momentum.

For more information, please reach out to TGOD directly at invest@tgod.ca